Stockmarkets bounce as Germany backs sovereign debt rescue policies

Financial markets breathed a collective sigh of relief after Germany's top
court gave its backing to sovereign debt rescue policies but tempered
optimism by putting obstacles in the way of any future bail-outs.

The court's double-edged ruling closes the door on joint-debt issuance in the eurozone or any move towards fiscal union under current treaty lawPhoto: EPA

Stockmarkets bounced amid relief that the nightmare scenario of a bail-out ban had been averted. However, the court said that there could be no further eurozone rescues without the prior backing of the Bundestag, greatly limiting the ability of any German Chancellor to strike EU deals.

"This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank cheque authorising further rescue measures," said the court's president, Andreas Vosskuhle.

The ruling saw European shares soar and bond spreads narrow. The FTSE 100 enjoyed its best performance since May 2010, rising 161.75, or 3.1pc, to 5318.59. Greek stocks climbed an eye-watering 8pc, while in Germany the Dax closed up 3.7pc and France's CAC-40 finished 3.6pc higher. The Dow Jones rose more than 2pc to 11371.53 in mid-afternoon trading.

The iTraxx Crossover index or "fear gauge" for credit risk plunged 35 basis points to 729, though it remains near record highs. Spot gold dropped sharply, down $91 to $1,804, on greater risk appetite.

George Soros, writing in the New York Times ahead of the court decision, warned that the eurozone "crisis has the potential to be a lot worse than Lehman Brothers".

The court's double-edged ruling closes the door on joint-debt issuance in the eurozone or any move towards fiscal union under current treaty law. "It is a clear rejection of eurobonds," said Otto Fricke, finance spokesman for the Free Democrats (FDP) in Germany's governing coalition.

Chancellor Angela Merkel said the ruling validated her rescue policies, and once again vowed to do whatever it takes to ensure the survival of monetary union.

"History has shown that countries with a common currency never wage war against one another, and that is why the euro is far more than just a currency. If the euro fails, Europe fails. It must not fail, and will not fail," she said in an emotional speech.

The judges said the EU's nexus of bail-outs and rescue machinery are allowable under Germany's constitution because they do not entail "automatic" transfers that might undermine German fiscal sovereignty.

However, they stressed that parliament's power to tax and spend is the foundation of German democracy and must not be eroded. The decision gives veto powers to the Bundestag's budget committee, dominated by the Christian Democrats and the FDP.

Finland, the Netherlands and Slovakia are all eyeing variants of this legislative brake, raising further questions about the workability of the eurozone's bail-out fund.

Concern about such moves increased on Wednesday after Ireland's finance minister, Michael Noonan, warned that the eurozone's bail-out fund was too small and complained that progress to implement changes agreed in July to expand its size was "slow". The warning came as the IMF downgraded Ireland's growth forecast for 2011 from 0.6pc to 0.4pc.

Those views were echoed by UK leader David Cameron and EU President Herman Van Rompuy who met to discuss issues facing Europe. A Downing Street spokesman said the two agreed that the "immediate priority is to implement" the July agreements.